Canada: The Mortgage Clause: Insurers And Adjusters Shouldn’t Overlook The Role Of The Standard Mortgage Clause In The Property Insurance Policy

A version of the Standard Mortgage Clause (SMC) is found in virtually every property insurance policy where a mortgage underlies the property ownership. The standard wording of the SMC is:

Breach of Conditions by Mortgagor, Owner or Occupant – this insurance and every documented renewal thereof – AS TO THE INTEREST OF THE MORTGAGEE ONLY THEREIN – is and shall be in force notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured.

The potential effect of the SMC is much greater than the brevity of this clause might indicate.

The effect of the SMC was examined by the Supreme Court of Canada in National Bank of Greece (Canada) v. Katsikonouris, (1990) 2 S.C.R. 1029. The Court explained that the SMC allows lenders to "piggy-back" on the insurance purchased by the insured/mortgagor and is akin to an independent contract between the insurer and the mortgagee. Essentially, with no further payment of premium, the mortgagee derives the entire benefit of the insurance policy as if the policy had been issued separately to the mortgagee.

Further, the court found that the insurance coverage of the mortgagee will not be invalidated by any omission or misrepresentation of the insured. Therefore, regardless of egregious conduct by the insured, such as arson, the mortgagee's insurance cannot be invalidated.

However, the power of the SMC surpasses the insured's conduct and appears to apply regardless of the mortgagee's conduct as well. In Royal Bank of Canada v. State Farm Fire and Casualty Co., 2005 SCC 34 (2005), the insurer denied the claim of the insured and the mortgagee arising from a fire loss. The insurer claimed that the dwelling was vacant, which was a material change in risk as to the occupancy of the dwelling, thereby removing coverage. The insurer further claimed that the SMC did not apply because the mortgagee was specifically aware that the dwelling was vacant. In fact, the mortgagee had foreclosed on the home, thereby instigating the vacancy, and had assumed control of the dwelling at the time of the fire.

The insurer argued that Statutory Condition 4, which permits the insurer to void coverage where there is a material change in risk, applied to limit the grant of coverage under the SMC. The Supreme Court of Canada did not agree, finding that to the extent the SMC was in conflict with Statutory Condition 4, the SMC prevailed. As the closing words of the SMC provide that the mortgagee's coverage shall remain in force despite any act of the mortgagors, the SMC supersedes any conflicting policy provisions.

The fact that the mortgagee's actions had caused the vacancy had no effect on coverage for the mortgagee. Thus, given that SMC clauses do not generally include any limitations or impose any obligations on the mortgagee, the SMC extends virtually unfettered coverage to the mortgagee regardless of the actions of either the insured or the mortgagee.

An open question in interpreting the SMC is whether the mortgagee can demand payment for the equivalent of replacement cost, or if payment should be made on an ACV basis. Arguably, allowing for replacement cost as opposed to ACV is a potential windfall to the mortgagee whose security in the property is typically limited to the depreciated value of the dwelling (in addition to the land). Further, allowing replacement cost recovery where there has not actually been replacement puts the mortgagee in a better position than the insured would have been in, as the typical replacement cost wording requires that the structure actually be replaced.

The commonly used SMC wording states that the SMC extends "as to the interest of the mortgagee only therein." One interpretation of this phrase is that the SMC extends the policy only so far as the mortgagee's interest in the property at issue. As the mortgagee's security interest in the dwelling is restricted to the depreciated value of the structure, only ACV is available.

On the other hand, it is possible that the phrase simply means that the SMC terms are restricted to the mortgagee and are not for the benefit of the insured. This argument finds some support in the Royal Bank of Canada v. State Farm Fire and Casualty Co. case, as the Court found that a similar phrase, "but only to the interest of the mortgagee," meant that terms of the policy that conflict with the SMC, including exceptions to the mortgagor's coverage, do not affect the mortgagee's coverage.

There is little helpful Canadian case law on this issue. In Voloudakis v. Allstate Insurance Co. of Canada, (1998) O.J. No. 354, the insurer made two payments under the SMC for replacement cost to the mortgagee, although it seems that replacement did not actually took place, and counterclaimed against the Plaintiff for the amount of those payments. Thus, it appears the insurer conceded prior to trial that replacement cost, without actual replacement, was the correct method of valuation pursuant to the SMC and, therefore, the issue was not squarely before the Ontario Superior Court of Justice. However, the court allowed the insurers counterclaim for paying out the replacement cost under the SMC without any consideration of whether this was the correct method of valuation.

A different result arose in Sholidis v. Economical Mutual Insurance Co., O.J. No. 2242, where prior to trial the insurer and mortgagee agreed that ACV was the correct method of valuation. Each retained an appraiser to give an opinion as to the value of the building and the land and arrived at an agreement as to the dwelling value. The insured was not part of this process. The Court noted its, "reluctance about allowing the award under the appraisal methodology used by the insurer and the mortgage company." However, it did not elaborate whether its reluctance was because the insured was not given the opportunity to obtain his own appraisal, or because ACV was used as opposed to replacement value. Given that the dwelling was never actually replaced, as required by the policy in order to invoke replacement value, it is difficult to imagine how anything other than ACV would have been appropriate.

Thus, it is an open question whether a mortgagee is entitled to replacement cost given that its interest in the property, and its security for the mortgage, is limited to the depreciated value of the dwelling (in addition to the land).

Recently, a more detailed SMC has been seen from some insurers to address issues such as the mortgagee's obligation to report a material change in the risk, and the insurer's option to pay out the mortgage in full and take an assignment of the mortgage where the loss under the policy is greater than the mortgage balance. However, the correct method of valuation under the SMC has yet to be defined.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Hollis Bromley
In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.